A Stock Trader’s Guide to China’s Potential Exit from Covid Zero

(Bloomberg) – The epic rise in the Chinese market this week is a harbinger of what could happen if the nation visibly moves away from the Covid Zero policy that has stifled the economy.

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Unverified online posts about China’s reopening helped major stock indicators post their best weekly performance in years and boosted yuan gains. Investors joined the buying frenzy after a brutal year, undeterred by increasing lockdowns and even as the country’s top health body reiterated its commitment to Covid Zero.

“Although things are still in the realm of hearsay, the end goal is now in sight,” said Yu Yingbo, fund manager at Shenzhen Qianhai United Fortune Fund Management Co. A reopening “is almost at arm’s length.” “, he said, expecting the trade to gain momentum.

While a Bloomberg News report on Friday said China is working on plans to scrap a system that penalizes airlines for bringing virus cases into the country, many remain uncertain about how and when the economy will reopen. But after months of losses, investors are struggling not to position themselves for an eventual exit from pandemic curbs, which would trigger pent-up demand from hundreds of millions and ripple into markets around the world.

Here is a guide to negotiating China’s long-awaited reopening.

Retail revival

A revival of banquets and business events could increase catering services, a benefit for distillers Kweichow Moutai Co. and Wuliangye Yibin Co., and restaurants like Haidilao International Holding Ltd., which jumped more than 20% this week only.

The reopening will improve the outlook for the broader economy, a boon for the cohort of consumer staples, like Inner Mongolia dairy producer Yili Industrial Group Co. and Yihai Kerry Arawana Holdings Co., one of the largest country’s food processors.

To be sure, the Covid China policy pivot is unlikely to be straightforward, creating volatility as traders ponder secret signs and policy adjustments. Any loosening will be followed by a spike in infections, arousing distrust among the public who have been largely isolated from the virus.

“For investors who don’t mind volatility, reopening and consumer games make sense, but you need to be able to tolerate the risk,” said Grace Tam, chief investment adviser for Hong Kong at BNP Paribas Wealth. Management.

luxury return

Spending could go far beyond household staples to more upscale purchases, boosting China Tourism Group Duty Free Corp., which operates an offshore duty-free resort in Hainan. Its onshore shares jumped 18% this week, cutting the loss for the year to 10%.

Asia’s contribution to European luxury sector revenue will also recover if Chinese tourists return. Kering SA, owner of the Gucci brand, suffered from falling sales in China.

“A potential easing of Zero Covid would be a welcome positive for luxury stocks,” Swetha Ramachandran, lead fund manager at GAM Luxury Brands, said in an email, noting that he would support the return of greater mobility. as well as renewed optimism among the Chinese. consumers.

Travel Boom

Airlines could finally see a turnaround if China opens up. China Eastern Airlines Corp., Air China Ltd. and budget names like Spring Airlines Co. stand to gain.

Read: China said it is preparing a plan to end Covid flight suspensions (1)

Shanghai Co. International Airport, one of the country’s busiest airline hubs, and Guangzhou Baiyun Co. International Airport will also benefit, with both companies seeing gains of around 30% up to present this year.

Japanese cosmetics makers such as Shiseido Co. will be among the main beneficiaries of Chinese buyers. The cohort accounts for 80-90% of inbound cosmetics sales, according to Jefferies Financial Group Inc.

Vaccine boost

Covid vaccine makers are in the spotlight as higher vaccination rates are seen as a prerequisite for easing China.

CanSino Biologics Inc. has more than doubled in the past two weeks in Hong Kong as Chinese cities adopted its inhaled vaccine.

Other stocks to watch include Walvax Biotechnology Co., which is developing a homegrown mRNA booster, and China Meheco Co., which has struck a pact to distribute the oral pill from Pfizer Inc. Shanghai Fosun Pharmaceutical Group is marketing a local Covid medicine. All have gained double digits on the continent this week.

China will also need to improve medical facilities in lower-tier cities and upgrade hospital equipment to prepare for a possible rise in infections. Potential winners include Jiangsu Hengrui Medicine Co. and Jiangsu Yuyue Medical Equipment & Supply Co.

Goods

As the world’s largest importer of crude and second largest consumer of oil, a recovery in China’s economy will boost demand for commodities and trickle down to Australian miner BHP Group Ltd. US-listed copper producer Freeport-McMoRan Inc.

China’s top refiner and energy producer – China Petroleum & Chemical Corp. and PetroChina Co. – are the ones to watch as domestic demand for gasoline, diesel and jet fuel recovers.

Yuan Support

The yuan has been under pressure this year, weakening more than 10% against the dollar as the People’s Bank of China has maintained an accommodative monetary policy in divergence from the Federal Reserve.

Morgan Stanley expects the yuan to strengthen if China eases its Covid Zero policy, given better growth prospects and stock inflows. Going forward, the involvement could be mixed with potential service sector outflows on outbound travel, the strategists wrote this week.

“China is a region where we are accumulating,” Subash Pillai, regional head of client investment solutions for Asia-Pacific at Franklin Templeton Investment Solutions, said this week. “Looking out 12 months, we’re pretty confident that China will reopen in a material way.”

–With help from Sarah Jacob, Wenjin Lv, Sarah Chen and Hallie Gu.

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